2011 gdc online emerging trends in gaas

Emerging Trends in Games-as-a-Service Atul Bagga Senior Research Analyst, Lazard Capital Markets

Agenda •  Games-‐as-‐a-‐Service

–  Lines blurring between pla6orms; Tablets, Set-‐top boxes –  Innova=on by startups

•  Virtual Goods –  Perfect Price Discrimina=on –  Enhance Community/Curb Piracy –  Higher quality of earning (a) Predictability, (b) Life=me Value

•  Social Games –  Ver=cal Games –  Mone=za=on (a) Conversion, (b) Adver=sing –  Pla6orms dedicated for games

•  Mobile Games –  Rise of persistent games –  Mobile an extension of other pla6orms –  Dominated by a few?

4

Top Companies By Revenue CAGR (2008-‐2010)

5

Top Companies By Revenue CAGR (2008-‐2010)

0%

10%

20%

30%

40%

50%

60%

70%

80%

0% 20% 40% 60%

EBIT Margin

Reve

nue

CAG

R (2

008-

2010

)

Gree Inc.DeNA Co. Ltd.Zoo Entertainment Inc.Gamevil Inc.Perfect World Co. Ltd.mixi Inc.NHN Corp.NetDragon Websoft Inc.Tencent Holdings Ltd.Neowiz Games Corp.NCsoft Corp.Netease.com Inc. ADSChangyou.com Ltd.Kingsoft Corp. Ltd.Gameloft S.A.

Source: FactSet

6

Enterprise Value/Sales MulDple U.S. Video Game Companies Shares

0

1

2

3

4

5

6

7

Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

ATVIERTSTTWOTHQI

Source: FactSet

7

Emergence of MulD-‐Channel Games-‐as-‐a-‐Service

LCM Research

SubscripDon

Upfront Purchase Ads &

Others

Virtual Goods

Console Game

Mobile Game

PC Game

Mul6-‐Channel Games-‐as-‐a-‐Service

Social Game

Source: LCM Research

Emergence of Games-‐as-‐a-‐Service

2010E 2015E

Games-‐as-‐a-‐Product

Games-‐as-‐a-‐Service


9

Video Game Market Size EsDmate ($ Million)


-‐

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2009E 2010E 2011E 2012E 2013E 2014E 2015E

Social

Online

Mobile

Console

10

0

10000

20000

30000

40000

50000

60000

2010E 2011E 2012E 2013E 2014E 2015E

Rest of World

U.S.

South Korea

Japan

Europe

China

Video Game Market Size EsDmate ($ Million)


12

Price DiscriminaDon

Sources: Unless otherwise noted, images on this and the following slides are courtesy of the respec=ve companies’ Websites.

13

Price DiscriminaDon

Source: Caroline Scob; hbp://www.explorecrete.com/gallery/album19/donkey hbp://www.smokymountainparkarabians.com/

14

Price DiscriminaDon

15

TradiDonal Models Represented Lost Economic Value

§  Tradi=onal gaming models didn’t capitalize on the full spectrum of consumer demand §  Game sa=sfac=on and status were gained by bea=ng levels with skill, not by personaliza=on and purchased status symbols

§  Consumers who were willing to spend more on games weren’t able to, outside of peripherals and merchandise

§ Consumer surplus represented lost economic value for publishers

Supply

Demand

Price

Quan=ty

All Customers Pay One Price

Some Customers Willing to Pay Higher Prices

Consumer Surplus = Lost Revenue

$50

$


16

Limited EdiDons and Map Packs Captured More Revenue

(1) Pricing is approximate. (2) Source: Microsog.

§  “Limited” and “Collectors” Edi=on games made headway in price discrimina=on, capturing addi=onal revenue

§ While this price discrimina=on resulted in higher revenue, there were s=ll rela=vely few op=ons available for hardcore gamers

§  Further, these op=ons came at a higher cost for publishers: § Halo 3 “Legendary Edi=on” box included a large, physical plas=c helmet

§ Map pack content has high produc=on cost

§  Yet the virtual model was proven: Map packs were only available digitally on XBOX Live, but 25% of players purchased them(2)

§ Map packs had PR hype equal to that of the original Halo 3 release

Supply

Demand

Price

Quan=ty

Halo 3: Standard Pricing(1)

Hardcore gamers could spend incrementally more, if desired

Yet S=ll, Lost Revenue

$60

Halo 3: “Limited Edi=on” Price(1)

$75

Halo 3: Map Pack Priced at $15

$90

$

17

Virtual Goods Enable Perfect Price DiscriminaDon

Supply

Demand Price

Quan=ty

§ While virtual map packs and Limited Edi=on physical media enable par=al price discrimina=on, virtual goods enable perfect price discrimina=on for social games and MMOs

§  Some “hardcore casual” gamers willing to spend $10k+/month on virtual goods

§  There is no “price” for the game

§  In complex virtual economies, virtual goods (e.g. a $100k space sta=on in Entropia Universe) can generate significant revenue for their owners, represen=ng more of an asset than an expense §  Jus=fies high end purchases

With the true cost of virtual goods close to zero, there is effec=vely no “supply” curve – goods are readily supplied at all price points

$

18

Source: hbp://www.dealbreaker.com/images/entries/Pistol%20Pirate%20Bust.jpg

hbp://socialjus=cenow.files.wordpress.com/2009/01/world-‐connect-‐people-‐community-‐interna=onal.jpg

19

Build Community

Source: Company Reports, AppData, LCM Research

0

10

20

30

40

50

60

70

80

World of Warcrag

Cityville The Sims Social

Angry Birds

20

Source: Acclaim

Big spenders

Paying Users

Free Users

Mone=za=on line

$1

$15

ARPU

$100+

Everyone pays Everyone pays

1 X

10 X

PAY

Ads Sponsors

21

Longevity & SDckiness: Average Chinese Gamer ARPPU (RMB/Qtr)

Source: IDC, LCM Research

0

10

20

30

40

50

60

70

80

2003 2004 2005 2006 2007 2008 2009 2010

22

Game Spend As Percentage Of Per-‐Capita Income


0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

2003 2004 2005 2006 2007 2008 2009 2010

Games Spend as % of Per-‐Capita Income

U.S.

China

South Korea

0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35% 0.40% 0.45% 0.50%

2003 2004 2005 2006 2007 2008 2009 2010

Games Spend as % of Per-‐Capita Income -‐ ex-‐Food

23

Players Willing To Spend More…

Source: Na6onal Bureau of Sta6s6cs of China, Korea Game Development Ins6tute, EuroMonitor Interna6onal

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

U.S. South Korea China

Games As % of Per Capita Income

24

…And The Vendors Are More Profitable

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

SNDA GA PWRD NTES CYOU ERTS ATVI THQI TTWO

Operating Margin ROE

Source: Company Reports

25

Legend of Mir 2

•  2D MMORPG, Mar=al Arts, Adventure •  Developed by Wemade, operated by Shanda •  Launched in China in 2001 under subscrip=on based model •  Converted to free-‐to-‐play model in 2005 •  PCU ~400-‐500K

26

Mir 2 Revenue’s Growth A]er Model Change


0

50

100

150

200

250

300

350

400

450

2002 2003 2004 2005 2006 2007 2008 2009 2010

Revenu

e ($ M

illion)

Year

27

…And ARPPU Growth A]er IniDal Kneejerk

Source: Company Reports, LCM Research

Es=mated ARPPU

0

50

100

150

200

250

300

350

400

2002 2003 2004 2005 2006 2007 2008 2009 2010

ARPU

RMB/Quarter

28

ZT Online

•  2D MMORPG, Mar=al Arts, Adventure •  Developed and Published by Giant Online •  Launched in 2007 •  Free-‐to-‐play, pay for virtual goods model •  PCU: 1 million+

29

70%+ Higher ARPPU Compared to WOW

0 20 40 60 80

100 120 140 160 180

World of Warcraft ZT Online

AR

PU ($

/Yea

r)


30

Top Players Pay 20x of WOW ARPU

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Top 5% Players 15% Players 80% Players WOW


31

ARPPU DistribuDon Curve of ZT Online

(20)

-

20

40

60

80

100

120

140

160

- 500 1,000 1,500 2,000

Users ('000)

ARPu

($/M

onth

)


32

Examples of MoneDzaDon

•  Game Design (System for marriage, breeding, paren=ng, balance between males/females)

•  Special In-‐game Events (Valen=ne’s day, New Year’s day, Sports)

•  In-‐game Promo=ons •  Treasure Chest

–  Special Bonus for Opening Most Chests

•  Chat & Response

33

Virtual Goods: Global Market Size EsDmate ($ Million)

-‐

5,000

10,000

15,000

20,000

25,000

2010E 2011E 2012E 2013E 2014E 2015E

Mobile

Social Network

Online (off-‐Social Networks)


34

Virtual Goods: Global Market Size EsDmate ($ Million)

-‐

5,000

10,000

15,000

20,000

25,000

2010E 2011E 2012E 2013E 2014E 2015E

Rest of World

U.S.

South Korea

Japan

Europe

China


36

Mid-‐session vs. Persistent Games

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

AppStore Facebook - Now

Facebook-May, 09

Persistent Mid-session

Source: AppData, LCM Research

37

Console Games: U.S. Market Size

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

2,000

4,000

6,000

8,000

10,000

12,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Y/Y

Gro

wth

$ m

illio

n

Source: NPD

38

Average Game Play Hours Per Week On Console

0.0

5.0

10.0

15.0

20.0

25.0

2006 2007 2008 2009

Source: The Nielsen Company

39

Games Going Social – What We Have Seen

•  Facebook opening up a new market similar to Wii •  55% of Facebook users play games on Facebook and Games account for ~40% of page views of Facebook

•  Facebook games not just games but also a mean of communica=on, a mean to express oneself in virtual environment

40

Gaming Versus Expression

0

50

100

150

200

250

Video Game Luxury Goods

$ B

illio

n

Source: Bain & Company, PWC

Trends in Social Games •  Focus on Mone=za=on

–  Conversion –  Adver=sing –  Payment mechanisms

•  Pla6orm maturing –  IPs Maber

•  Social Games outside Facebook –  Using Facebook social graph –  New pla6orms

•  Mobile another wave of disrup=on –  Loca=on: convergence of physical and virtual world

41

Focus on MoneDzaDon – ARPU ($/MAU)

42


-‐

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Mixi DeNA Gree Giant ChangYou US Social Games

US MMO

Focus on MoneDzaDon – ARPU Adjusted for GDP

43

-‐

50

100

150

200

250

300

350

400

450

500

Mixi DeNA Gree Giant ChangYou US Social Games

US MMO


Focus on MoneDzaDon: AdverDsing

44

AdvertisingVirtual Goods -

Indirect PaymentVirtual Goods - Direct Payment

Playdom 5-10% 15% 75-80%Kabam NA 10% 90%Rekoo 10% NA 90%Serious Business 10% 10% 80%


Focus on MoneDzaDon: AdverDsing

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

WebMD The Knot Yahoo! Demand Media Social Games

ARPU/DAU

45

Source: comScore, Company Reports

MoneDzaDon – Payment Mechanisms

0

100

200

300

400

500

600

700

800

900

1000

Dec-‐10 Jan-‐11 Feb-‐11 Mar-‐11 Apr-‐11 May-‐11 Jun-‐11

Mobage ARPU – Before & A]er Carrier Billing

Source: DeNA

47

Social Games Outside Facebook

•  Social feature no longer a proprietary of SNS •  Users want to stay connected with friends – to brag, to

compete, to have a fun-‐experience together •  Mone=za=on of DeNA vs. Mixi •  First itera=on of social games outside Facebook already

there •  Next itera=on of social games with deeper integra=on/social

games from ground up –  Imagine a social shooter, ac=on game – trophy save your real-‐life

friend in virtual environment

ARPU Comparison– Game Centric SNS Vs. Broad SNS

Mixi Mobage

Approximately 10x

Source: DeNA

As Plaiorm Matures; IPs Become More Important

49

2009 2006Game Publisher Game Publisher

1 Battlefield 1943 Electronic Arts Geometry Wars Bizzare Creations2 Castle Crashers The Behemoth Gauntlet Midway Games3 Trials HD Microsoft Games Smash TV Midway Games4 Hasbro Family Game Night Electronic Arts Bejeweled II Oberon5 Shadow Complex Microsoft Games Zuma Oberon6 Marvel vs. Capcom 2 Capcom Bankshot Billiards PixelStrom7 Magic: The Gathering Wizards Of the Coast Outpost Kaloki NinjaBee8 UNO Gameloft Mutant Storm Reloaded Microsoft Games9 Worms Microsoft Games Joust Midway Games

10 Peggle PopCap Games Wik: Fable of Souls Reflexive Entertainment

Source: IGN, Majornelson.com

As Plaiorm Matures; IPs Become More Important

50

Rank Game Publisher Price1 The Sims Electronic Arts $6.992 The Oregon Trail Gameloft $4.993 Need for Speed: Undercover Electronic Arts $4.994 Madden NFL 10 Electronic Arts $4.995 Tiger Woods PGA Tour Electronic Arts $0.996 Assassin's Creed: Altair Chronicles Gameloft $4.997 Flight Control Firemint $0.998 Cooking Mama Taito $6.999 Civilization Revolution Take-Two $6.99

10 Wheel of Fortune Sony $0.99

Source: Apple

51

Social Game: Global Market Size EsDmate ($ Million)

-‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010E 2011E 2012E 2013E 2014E 2015E

Adver=sing

Virtual Goods


52

Social Gaming: WW Market Size EsDmate ($ Million)

-‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010E 2011E 2012E 2013E 2014E 2015E

Rest of World

U.S.

Japan

Europe

China


Mobile: Next Wave of DisrupDon

54

Source: Interna=onal Telecommunica=on Union, NPD

Smartphone Market PotenDal

55


0 50

100 150 200 250 300 350 400 450

U.S. Europe

Mobile Subscribers Smartphone Users

Smartphone Market PotenDal

Smartphone Vs. Feature Phone – U.S.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

2011 Q3

Featurephone

Smartphone

Source: The Nielsen Company

Global Smartphone Installed Base

58

Source: Ericson

0 500

1000 1500 2000 2500 3000 3500 4000 4500 5000

2010E 2011E 2012E 2013E 2014E 2015E 2016E

User Preference Towards Games

Android Opens Up Another Opportunity

Tablets Open Up Another Opportunity

0

5

10

15

20

25

30

35

40

1 2 3 4 5

Millions

Quarter Since Launch

CumulaDve Sales Of iPad vs. iPhone vs. iPod

iPad

iPhone

iPod

Source: Apple

Tablets Open Up Another Opportunity

0

50

100

150

200

250

300

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Millions

Quarter Since Launch

CumulaDve Sales Of iPad vs. iPhone vs. iPod iPod

iPhone

iPad

Source: Apple

Skipping The PC Web?

0

200

400

600

800

1000

1200

Popula=on Internet Users Broadband Users

Mobile Subscribers

Number of Subscribers in India (Million)

63

Source: Telecom Regulatory Authority of India, InternetWorldStats.com

No Contract, Android = $150

Source: www.flipkart.com

65

Global Mobile Games Market Size EsDmate ($ Million)

-‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010E 2011E 2012E 2013E 2014E 2015E

Social Games

Downloadable Games


66

Global Mobile Games Market Size EsDmate ($ Million)

-‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010E 2011E 2012E 2013E 2014E 2015E

Rest of World

U.S.

South Korea

Japan

Europe

China


68

QUESTIONS?

2011 gdc online emerging trends in gaas

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